Last Updated Oct 3, 2008 8:56 AM EDT
How bad is it? Words like unprecedented and unimaginable and other superlatives all fit.
What went wrong? Instead of having a run on then banks, we had a run on the banking system. I warned aTreasury Select Committee in May about the credit default swaps death- spiral. Nobody understands the banks' financial statements and reports, either.
You can be totally transparent, as Northern Rock was, but if your report of one off balance-sheet vehicle runs to 415 pages and is virtually unreadable, it takes an incredible amount of time to get your head around what's going on. I doubt there are 100 people in the UK who could understand AIG's recent reports -- it's inconceivable that even its own board members understood the whole thing.
Take its "super senior credit default swap" -- which probably killed it, although there were plenty of other things that would've brought it down. No-one knew what it was. Its own definition implied that they were contracts that could not fail. It's written off about Â£30bn of them.
So many different things went wrong -- you had people blaming everything from Sovereign Wealth Funds fuelling liquidity to short sellers. Have a feeling international accounting regulations may be making it worse. But ultimately, it doesn't matter who made the weapons, it's the bankers who used them.
Are other industries vulnerable to failure? Property's next --there's no price on vacant commercial property in the UK now. Hedge funds, many of which rely on funding from banks -- and may not have sensible structures to weather a downturn. It will be like bringing down pheasants at a shoot.
The private equity industry is likely to go through a period of retrenchment.
Will this lead to further regulation of the financial sector? US regulations tend to be quicker and more simple. We are likely to over-regulate here. We'll generate 6,000 pages of incomprehensible garbage. I can see it [change] going too far.
What's missing is a one-page description of the changes that will need to be made. There's no sign of that leadership -- and I don't see it forthcoming.
What needs to happen? Somehow we need to end up with trustworthy banks, that will be simpler and more regulated. That's central. It sounds straightforward but it's not that easy to implement.
I cannot tell you what the financial market will look like in a few years' time, but overall it's likely to be a change for the better.